A limited constitutional government calls for a rules-based, freemarket monetary system, not the topsy-turvy fiat dollar that now exists under central banking. This issue of the Cato Journal examines the case for alternatives to central banking and the reforms needed to move toward free-market money.

The more widespread use of body cameras will make it easier for the American public to better understand how police officers do their jobs and under what circumstances they feel that it is necessary to resort to deadly force.

Americans are finally enjoying an improving economy after years of recession and slow growth. The unemployment rate is dropping, the economy is expanding, and public confidence is rising. Surely our economic crisis is behind us. Or is it? In Going for Broke: Deficits, Debt, and the Entitlement Crisis, Cato scholar Michael D. Tanner examines the growing national debt and its dire implications for our future and explains why a looming financial meltdown may be far worse than anyone expects.

The Cato Institute has released its 2014 Annual Report, which documents a dynamic year of growth and productivity. “Libertarianism is not just a framework for utopia,” Cato’s David Boaz writes in his book, The Libertarian Mind. “It is the indispensable framework for the future.” And as the new report demonstrates, the Cato Institute, thanks largely to the generosity of our Sponsors, is leading the charge to apply this framework across the policy spectrum.

Search form

Tag: globalization

University of Michigan economist and American Enterprise Institute scholar Mark Perry has an excellent oped in today’s Wall Street Journal [$] about how U.S. manufacturing is thriving. It can’t be emphasized enough how important it is to present such illuminating, factual, compelling analyses to a public that is starved for the truth and routinely subject to lies, half-baked assertions, and irresponsibly outlandish claims about the state of American manufacturing.

The truth matters because U.S. trade and economic policies—your pocketbook—hang in the balance.

For more data, facts, and background about the true state of U.S. manufacturing, please see this Cato policy analysis and these opeds (one, two, three).

When it became clear that President Obama would make “competitiveness” a theme of his SOTU address, I looked forward to seeing Paul Krugman’s statement pointing out how much nonsense that is. Here he is, after all, in his excellent 1997 book, Pop Internationalism (MIT Press):

…International trade, unlike competition among businesses for a limited market, is not a zero-sum game in which one nation’s gain is another’s loss. It is [a] positive-sum game, which is why the word “competitiveness” can be dangerously misleading when applied to international trade.

Sure enough, President Obama’s speech last night was peppered with references to “the competition for jobs,” “new jobs and industries take root in this country, or somewhere else, “the competion for jobs is real,” etc. And of course there was a healthy dose of the usual mercantalist obsession with exports.

Although written before the President’s address was delivered, what would Paul Krugman 2.0 think of this sort of talk? The title of his column Sunday was certainly encouraging: “The Competition Myth.” But the substance of the column went in a … er… different direction from that which I had anticipated/hoped:

…talking about “competitiveness” as a goal is fundamentally misleading. At best, it’s a misdiagnosis of our problems. At worst, it could lead to policies based on the false idea that what’s good for corporations is good for America…

So what does the administration’s embrace of the rhetoric of competitiveness mean for economic policy?

The favorable interpretation, as I said, is that it’s just packaging for an economic strategy centered on public investment, investment that’s actually about creating jobs now while promoting longer-term growth. The unfavorable interpretation is that Mr. Obama and his advisers really believe that the economy is ailing because they’ve been too tough on business, and that what America needs now is corporate tax cuts and across-the-board deregulation. [emphasis mine]

In other words, Krugman’s objections to the “competitiveness” rhetoric are based on his fear that it will lead to policies favorable to corporations, not that the whole concept is flawed.

[Disclaimer: the above is by no means an exhaustive analysis of the problematic parts of the column]

I yield to no-one in my admiration for Paul Krugman, trade economist. He made a real contribution to the discipline I’ve loved since I was a teenager. But Paul Krugman, columnist…not so much.

At the beginning of the Obama administration, I had the audacity to hope that the new president would defy conventional wisdom and become a proponent of trade and a good spokesman for its benefits. Scott Lincicome and I even wrote a 20,000-plus word Cato analysis explaining why the economic, geopolitical, and domestic political environment offered the president a unique opportunity to steer his party back to its pro-trade roots.

The thrust of our analysis was that, despite the campaign rhetoric, the president understood the economic benefits of trade and that he would see it as an escape route from recession and a path to political success; that the president’s visibility and new cache with his trade-skeptical political party—and the fact that he wasn’t George W. Bush—made him well-suited to the task of challenging and extinguishing lingering myths about the alleged ravages of trade, while explaining its many benefits; and, that the president would recognize that pro-trade policies should be part of the current Democratic Party platform, if for no other reason than the fact that restrictions governments place on trade harm lower-income Americans and the world’s poor more than they hurt anyone else. (Protectionism is regressive taxation, which is presumably anathema to Democratic Party creed.)

From this administration, we’ve seen completed bilateral trade agreements sent to an off-site storage warehouse; the imposition of taxes on imported tires; “Buy American” provisions; prohibitions on Mexican trucks; demonization by the president of companies that outsource; defiance of multilateral rules governing use of the antidumping law; and, a “Boardwalk Empire”-style deal to prospectively compensate Brazilian farmers for the lower revenues they should expect on account of the lavish subsidies bestowed by U.S. taxpayers on U.S. cotton producers in lieu of reducing—or better still, halting—cotton subsidies altogether. Yes, the hallmark accomplishment of this administration’s trade policy so far is a deal that requires American taxpayers to subsidize Brazilian cotton producers for the right to continue subsidizing U.S. cotton producers.

Despite all that, I remained audacious (or gullible) enough to hold a glimmer of hope that the president would finally see the wisdom in our advice—given the new political landscape. That glimmer was snuffed out with publication of an oped in the New York Times this past Saturday, in which President Obama betrays profound misunderstanding of trade and its purpose. The president portrays trade as an enterprise that is won or lost at the negotiating table, where only the most savvy or most committed negotiators can succeed in bringing home the spoils. The president promises to fight hard to get Americans their fair shake from this dog-eat-dog process, while actual producers, consumers, workers, and investors are relegated to tertiary roles.

The central dysfunction between Americans and trade is the assumption—reinforced in the president’s op-ed—that exports are good, imports are bad, the trade account is the scoreboard, and our trade deficit means that we are losing at trade. That dysfunction resides comfortably within a zero-sum worldview, which the president touts in a purposeful cadence throughout the oped. In the penultimate sentence, the president writes:

Finally, at the Asia-Pacific Economic Cooperation meeting in Japan, I will continue seeking new markets in Asia for American exports. We want to expand our trade relationships in the region, including through the Trans-Pacific Partnership, to make sure that we’re not ceding markets, exports and the jobs they support to other nations.

By opining about trade without understanding that its real benefits are manifest in imports (here’s Don Boudreax’s elaboration of that process), the president is simply reinforcing myths that will continue to confuse and divide American. As long as politicians insist that our trade account is a scoreboard and that a surplus is a trade policy success metric, Americans will continue to be skeptical about trade.

To make his coming visit to India meaningful, President Obama needs to combat the impression that India fares better with Republican presidents than Democratic ones, because the latter are instinctively more protectionist. In his quest for economic recovery, he has bashed US corporations that outsource jobs to places like India, forbidden companies getting government rescue funds from outsourcing work, and has now enacted higher visa fees for visiting IT professionals which seem designed to hit Indian companies quite specifically. This may be designed to win votes in the Congressional elections, but will not win hearts and minds in India. President Obama needs to state categorically that he will not follow the Great Depression formula of trying to combat unemployment with protectionism.

A better way to create US jobs will be to relax labyrinthine export licensing rules for exports of dual-technology equipment and technology (which can be used for both civilian and defense purposes). India also needs to do its bit by shedding its reputation as world champion in anti-dumping actions (206 in the five years to 2009).

The charge sounds logical: Under the US corporate tax code, US-based companies aren’t taxed on profits that their affiliates abroad earn until those profits are returned here. Supposedly, this “tax break” gives firms an incentive to create jobs overseas rather than at home, so any candidate who doesn’t want to impose higher taxes on those foreign operations is guilty of “shipping jobs overseas.”

In fact, American companies have quite valid reasons beyond any tax advantage to establish overseas affiliates: That’s how they reach foreign customers with US-branded goods and services.

Those affiliates allow US companies to sell services that can only be delivered where the customer lives (such as fast food and retail) or to customize their products, such as automobiles, to better reflect the taste of customers in foreign markets.

I go on to point out that close to 90 percent of what U.S.-owned affiliates produce abroad is sold abroad; that those foreign affiliates are now the primary way U.S. companies reach global consumers with U.S.-branded goods and services; and that the more jobs they create in their affiliates abroad, the more they create in their parent operations in the United States. If Congress raises taxes on those foreign operations, it will only force U.S. companies to cede market share to their German and Japanese (and French and Korean) competitors.

Bloggers have alreadynoted the most glaring problems with Arthur Brooks, Edwin Feulner and Bill Kristol’s Monday Wall Street Journal op-ed, “Peace Doesn’t Keep Itself,” which worries that conservatives are figuring out that trying to run the world is not conservative.

The op-ed pretends that the fact that defense spending isn’t the largest cause of the deficit means it isn’t a cause of the deficit. It obscures the fact that we spend more on defense than we did in the Cold War by counting the defense budget as a portion of the economy without noting the latter has grown faster than the former.

So I can limit myself to less obvious angles. The first is that neoconservatives like Kristol are for increasing the defense budget no matter what. For them the military is basically an expression of national awesomeness (to use an academic term). Enemies and other details, like what we spend already, come up mainly in the justification phase.

In 2000, when U.S. defense spending was nearly $180 billion lower than today—excluding the wars and adjusting for inflation—Bill Kristol and Robert Kagan wanted to increase defense spending by $60 to $100 billion a year. After September 11, they called for a “large” and “substantial” increase. Having got that and then some, Kristol, at least, wants even more. The neoconservative appetite for military spending is insatiable because their militarism is.

Second, I want to pick on one point the op-ed makes because it is both wrong and widely believed: “Global prosperity requires commerce and trade, and this requires peace. But the peace does not keep itself.”

There are really two theories there. First, commerce requires general peace in supplier nations and military protection of supply lines. Second, only the United States can provide both. There is some evidence for these claims in a long-running correlation. Since World War II, U.S. military hegemony has coincided with explosive growth in global trade. So it’s easy to see how people assume causation. But as Chris Preble and I argue in the Policy Analysis that we just released, “Budgetary Savings from Military Restraint,” the causal logic here is weak. It overstates the U.S. military’s contribution to global stability and trade and the trouble that instability causes us.

The first theory is right in the sense that nations devastated by war ultimately lose purchasing power, which is bad for their trade partners. But in the meantime, warring countries typically need a lot of imports. They also generate capital for armies by selling goods abroad. For that reason, the Iranians and Iraqis kept pumping oil during their war. Wars do not simply shut down trade.

The argument for policing peacetime shipments is even worse, as I explain in a guest post I did yesterday for the Stimson Center’s revamped defense budget blog. As I note there, we do not really protect shipments now. A tiny minority get naval protection. Thus primacists tend to argue that what matters is not defending trade but the ability to do so, which deters malfeasants from harassing it or building capability to do so. But that argument gives the game away. You don’t need to do it in good times to do it in bad times.

What happens the day after we tell our Navy to stop sailing around in the name of protecting commerce? Who interrupts shipments? Would Iran start charging tolls at the Strait of Hormuz or China in the South China Sea? I say no because they know that we can force access and because there are plenty of ways to retaliate, including blockading those countries.

A more plausible claim is that some states would increase naval spending to police their own shipping. That seems like a good thing. Sometimes people say that such burden-sharing could set off a naval arms race that causes a war, say between India and China. I suppose that is possible, but naval arms races have caused few, if any, wars.

Let’s say our ability to buy some good from some area is cut off, either by instability at the source or en route. The likely outcome is supply adjustment, not supply failure. Generally another supplier takes the orders and prices adjust. That is particularly true as globalization links markets and increases supply options. It is when you have only one potential supplier that you really need to police delivery.

If you believe that military hegemony protects peacetime shipments, you could argue that it distorts price signals by shifting a portion of the good’s cost to federal taxes. Because I don’t believe that we are propping up prices in most cases, I say that what primacists are really selling is an attempted but failed subsidy to consumption of goods, including oil.

Oil is a special case because price shocks caused by supply disruption have in the past caused recessions. However, economists arguethat the conditions that allowed for this problem have changed. One change is the reduced burden energy costs now impose on U.S. household income. Others disagree, but if they are right, that is why we have public and private reserves.

You can read more of what we think of about the idea that only we can keep the peace among states in the Policy Analysis or in the stuff Cato scholars have been pumping out for years. I will just say here that primacists ignore all the history contradicting the idea that only hegemons create a stable balance of power and the many rivals that formed stable balances of power without an hegemon taking a side.

International stability and world trade would be OK without our nation trying to use our military to provide them. If you don’t believe me, you might read one of thesethreepapers by Eugene Gholz and Daryl Press. I took a lot of this from them.